Loans

3 Little-Known Facts About Student Loan Debt

In June of 2010, student loan debt made headlines when it surpassed credit card debt here in the U.S. Since then, outstanding student loan debt has surpassed the $1 trillion mark — making it the single largest form of household consumer debt outside of home loans.

There’s no question that student loan debt continues to be a growing concern — not only for students and graduates, but for parents, grandparents and policymakers alike.

With so much media attention on the state of student loan debt, public awareness of the issue has grown substantially. Despite this growing awareness, there are a few facts about student loans that may still surprise you — especially when it comes to their potential impact on your credit, and your ability to qualify for other types of loans in the future.

1. Co-Signers Can Suffer Too

Student loan debt isn’t only a problem facing current college students and recent graduates. These days, student loan debt spans all ages. According to the Federal Reserve Bank of New York, 6.8 million Americans aged 50 and older account for more than $149 billion in outstanding student loan debt. If that’s not surprising, consider that 2.2 million of those are age 60 and older. It is not clear how much of the debt is the result of their own student loans, and how much of it is co-signed loans for children and grandchildren — but the likelihood is that for some, it is both. The dangers of co-signing for a child or grandchild is that you’re just as responsible for the debt as the student.

Parents and grandparents want what’s best for their children/grandchildren, but it’s important to stop and think long and hard before cosigning on a student loan for them. If the student misses a payment or goes into default, the impact is just as damaging to both parties. And considering the increasing costs and the number of years it takes to pay back student loans, the risk can span ten years if not more. Struggling with student loan debt and the potential liability from a credit perspective is something that boomers and senior citizens are now facing at a critical point in their own lives — a time when retirement should be the priority.

If you’re considering whether to co-sign on a student loan, make sure you’ve exhausted all other strategies first — from scholarships, fellowships, work study, and a less expensive school.

2. Student Loans Could Keep You From Homeownership

Starting salaries for new college graduates has been another issue for students with student loan debt. A common mistake that many new college students make is assuming that their starting salary after graduation will more than cover the cost of any student loans they might need to cover education costs. The problem with this assumption is that starting salaries rarely exceed expectations.

According to the January 2013 Salary Survey from the National Association of Colleges and Employers, the average starting salary for 2012 graduates increased to $44,482, which is quite promising compared to the dismal numbers we’ve seen in the past few years. Despite the gradual improvement in salaries, monthly student loan payments may still end up taking a significant bite out of a recent graduate’s income.

What does this have to do with your credit and the chances of you qualifying for a mortgage loan? Depending on the amount of student loan debt you’re carrying, it could negatively impact your debt-to-income ratio. This may not sound like a big deal but if you plan to purchase a home at some point and you’re still carrying significant student loan payments, you may not be able to qualify for a mortgage loan.

To clarify, student loan debt doesn’t impact your credit scores in the way that credit card debt does. It’s an installment loan and as long as the debt is paid on time and in good standing, the amount of the loan won’t have a significant impact on your credit score. However, despite the belief that lenders rely solely on credit scores for lending decisions, they actually consider other factors, like your debt-to-income ratio and your ability to maintain and repay a loan.

In fact, a dear friend of mine had this very problem when he and his wife went to purchase their first home. His student loan debt knocked his debt-to-income ratio out of the qualifying range for the mortgage. In the end, they had to put their homebuying plans on hold until his income increases or he pays off his student loans — both of which could take several more years.

So if your student loans are preventing you from buying a home, consider budgeting for a more aggressive paydown plan. That might mean getting another job (or two), putting yourself on a stricter budget — or likely a combination of the two — and focus on paying it off.

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3. Bankruptcy Is Almost Never an Option

To add fuel to the fire, delinquency rates on outstanding student loans continue to rise. But if you’re thinking bankruptcy might be a way out of student loan debt, think again. In 1977 Congress banned federal student loans from being discharged in bankruptcy, and with the bankruptcy reform in 2005 private student loans were added to the list.

The only way student loans can be legally discharged in bankruptcy is if the borrower is able to successfully prove “undue hardship.” But don’t let the undue hardship petition fool you. The restrictions and requirements for meeting undue hardship are extremely difficult to qualify for. Unlike other types of debts, student loan debt is one of the most difficult debts to prove undue hardship — and is nearly impossible to do so. Unless your situation is utterly hopeless, and there’s no future possibility that you would ever be able to make any small effort to repay the loan, it’s not going to happen.

Lawmakers are introducing measures for debt relief, but until those measures are passed and in effect, your alternative is to work with your lenders through their various repayment programs.

Image: iStockphoto

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Deanna Templeton is a financial literacy advocate with 15+ years in the banking and consumer credit industries, including five years with FICO in their credit scoring division. She specializes in educating consumers on the importance of healthy credit management, and shares valuable insight on consumer credit and finance issues.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Dona Collins

The other day I was participating in a discussion on Twitter. Someone had suggested that using a credit card to pay off student loans was the way to go. Why? They felt as though they would then be able to have the debt erased in bankruptcy because it is now credit card and not federal student loan.

Any thoughts on this? I wondered how far back the bankruptcy courts would look to see if this is indeed what happened and, if so, if this could backfire on those who are using the technique.

Is it a viable solution (for those who don’t genuinely plan to file bankruptcy at the time they make the payment)?

George C

The downsides with credit cards compared to student loans are higher interest rates and shorter repayment time. The only exception is if you can find hot deals on balance transfers. And planning for bankruptcy is never a good idea even if one doesn’t care about the moral aspect.

Hi Donna – George hit the biggest issue regarding interest but it’s a great question and one that I’m sure many have considered at one point or another. It certainly sounds like a viable option, doesn’t it?

In reality, though, it’s not as feasible as it sounds for a couple of reasons. Is it possible? Probably. Is it wise? Probably not.

The first, and most obvious reason not to pay for student loans with credit cards is the financial impact from the interest alone. If we’re assuming that it’s an option for “those who don’t genuinely plan to file bankruptcy at the time they make the payment” – it’s just a bad financial choice. Interest rates on student loans are much, much lower than the interest rates you’ll pay on credit cards. It begs the question, why would you trade one debt for a debt that’s even worse?

The other drawback here is that if someone does technically end up in dire straits and is able to file a Chapter 7 Bankruptcy (where all debt is included in the BK), it’s not usually a situation that can be planned out years in advance. I’m not saying that it can’t be done, just that Chapter 7 Bankruptcies are a lot more difficult to qualify for and you’d have to meet minimum income requirements determined by the state you live in. Otherwise, you’re looking at a Chapter 13, in which case even though you may be able to significantly reduce the debts you owe, you’ll still be required to pay a portion of the debts –credit cards included.

There are a number of other caveats, of course, but those are the two biggies that come to mind. It’s an interesting topic to approach and we’re looking forward to covering it in an offical piece here on the Credit.com blog so stay tuned!

If you are really hurting financially. I would pay all your student loans off with your credit card. And then file Bankruptcy. You can file your credit card under Bankruptcy but not your Student Loans. In 3 years if you keep your records clean and pay your bills. You will be able to buy a home. And all your student loans will be paid for.
Just a thought.

gabi532

How about actually doing some financial planning and not going exorbitantly into debt in the first place??

cp

Great Idea!

FairySac

Anyone who has so much student loan debt that it affects them from other loans, isn’t going to have enough of a credit limit to pay off a $30k to $60k+ loan.

Cara

This is actually fraud, and it is commonly looked for when someone declares bankruptcy. Not only will you not be able to declare bankruptcy, you could go to jail if the government felt like prosecuting. I would not recommend this.

Deanna Templeton

You hit the nail on the head. Credit card fraud IS a criminal offense. The question actually spurred us to write a follow-up on this topic where we address three big reasons why this is a bad idea:

Credit Card Fraud Is a Crime
Credit card issuers weren’t born yesterday and they’re well versed in the potential for fraud surrounding bankruptcy filings. In which case, it’s important to understand that if an issuer has any reason to suspect fraudulent activity on an account, they can (and will) go back and flag any charges that appear suspicious — including student loan payoffs.
If a credit card issuer determines that any of the charges were made for fraudulent purposes– circumventing student loan bankruptcy laws, for example — the issuer is fully within their legal rights to press criminal charges. If you intentionally charge student loan debt on your credit cards for the sole purpose of circumventing the bankruptcy laws on student loan debt, and then file bankruptcy, you’re committing fraud.
If the tactic backfires and you get caught, credit card fraud is a criminal offense. In this case, you have to ask yourself: Is getting around the laws for filing bankruptcy on student loan debt really worth the risk of getting caught?

I wound up having to sell my house 3 years ago and have been living off and paying my credit card debt with the proceeds. However, I’ve run out of funds and I’m a 100% commisioned sign salesman and construction is way off. I’m simply unable to pay any longer, So a couple of months ago I had to stop. What should I do? I can’t pay them. All my life I’ve had great credit. I’m still keeping one card current.
Your advice is appreciated.

Wow what a wealth of information; all this is covered when you apply for college loans.
What I would like to see unraveled are the options and benefits for grads in public service such as law enforcement, teaching, or public health. The conflicting information and disclaimers are more than the professionals in collegiate financial aid are willing to tackle.
In many jurisdictions cops, teachers, paramedics, ER personnel are left to fend for themselves over student loans; the budget is so thin, pay / benefits / retirement is such a contentious issue, management won’t be seen providing any extra services to public service employees.
How about an article detailing issues and options on student loans for public service employees.

Credit.com

Thanks for sharing your story, Roger. This is definitely a topic that deserves to be addressed. While we can’t promise that we can address all of these issues, we’ll def. add it to our list of possible topics to cover for a future piece.

btw, Take advantage of LOW interest rates. You may be able to CONSOLIDATE YOUR LOANS! I did this shortly after i graduated. IT’s done a world of good!

cc

Sallie Mae has pulled a bait and switch with their loans. You are no longer able to consolidate private student loans with them. I have a program that if I make 24 ontime principle payments, then I can apply to have my cosignor dropped from my loans. But to do that I had to keep my original loans – so no consolidation when I left school. Several years later, I realized that I might be able to qualify for a consolidation without needing to use the program, so I called up to ask about it, only to find out that the previous month they had stopped consolidating loans.
Oh, and btw, they didn’t tell me the “principle” part until I called up after 24 payments to request my cosignor be let loose. They said that since I was on the 4 year graduated repayment plan, I was paying only interest (which they also did not make clear) and thus my 24 payments didn’t count.
I knew that no matter what, for the 1st half of the life of my loans, I would be paying more interest than principle, it’s how installment loans work, but it was not pointed out that the graduated repayment plan was interest only payments.
I am preparing for a chapter 13 bankruptcy right now and have been poring over past financial records. I found an old sallie mae statement of what my principle balance was in 9/2009, and one from the end of june this year…I keep anal retentive payment histories, so I was able to figure out that I have paid nearly 13k in that time frame to sallie mae, and only 2800 has gone to principle. If I were to pay on schedule, once I was done, I will have paid double the original amount borrowed plus some.
I recently discovered, and no one tells you, that in a chapter 13 bankruptcy, student loans are treated just like all other unsecured debtors in one and only one aspect. during your repayment plan, they will get the same percentage of the plan that your other unsecured debts do. They continue to grow at their regular interest rate, and you have to pick up payments after your repayment plan is over – whereas all other debt will be discharged. BUT in most jurisdictions, you are able to make payments to student loans outside the payment plan – something not permitted with other debts. This is what is making it worthwhile to me to do this bankruptcy – if I can continue to scrimp as I have been doing, I should be able to make those extra payments, and they will go directly to principle, thus reducing the amount used to calculate the interest.
Not everyone qualifies for chap 13, and there are some huge downfalls, like crappy credit for 5 – 7 years and no buying a house, and being monitored by the court during your plan – but for me, it’s going to be that long, or nearly so before I can do any of that stuff anyway, and as my situation stands pre-bankruptcy I am being forced to put off getting married and starting a family because I simply can’t afford to do it. I am getting older here, I can’t wait forever to have my children…
p.s, my federal student loans have been consolidated since the christmas before I graduated at 2.75%…

cp

And when are the colleges going to take responsibility for the way they overload people with the great “go back to school, get a good education,get a better job” we all know the drill, they plaster it on TV, radio, in print and so on. It is a lot like the housing crisis where they said “why rent when you can buy?” Credit card companies have been made to take some responsibility for the way that advertise, why not the student loans as well? Remeber your never to old to go back to college! of course no one will hire you because you are to old, and then you will most likley die BEFORE you get it paid back…

JeffS

All sellers of commodities advertise their products. Most take liberties with those advertisements. It is buyer beware.

College student parent

I’m currently paying off a parent unsubsidized Stafford loan at 6.8% but what no one is saying is they compound interest DAILY. $45 of my $87 monthly payment go to interest; it will take me 10 years to pay off $6000! I plan to re-finance through my bank. No wonder people are defaulting…

Linda Hilbert

My husband is having to pay his daughter’s payments, leaving us financially strapped!

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